There is, more often than not, considerable hype surrounding a new company’s initial public offering. However, as an investor, it is wise not to fall for this hype and put in your investment into an IPO without first doing your research.
What is An IPO?
This is a mechanism through which a company gathers the necessary funds to use as capital for its operations. Before an IPO, a company may have been privately owned, which means that its investors are either the people who make up their board or friends of these people that decide to put in money into the venture.
With an IPO, however, the company opens itself up for investment by the general public. A company’s board may decide to go public for a variety of reasons, e.g. expansion of operations, raise funds for a subsidiary spin-off and many others.
That is why there is a lot of hype for an IPO. A company will want to attract attention, as it attempts to amass the necessary funding for whatever reasons it deems necessary for itself to offer opportunities for investment to the public.
Three Questions to Ask Before Investing in an IPO?
A wise investor knows that he or she should lay back, distance themselves from the hype, and look at the stuff objectively before they commit their finances to investing in the company making the public offering.
To guide you along the decision-making process, here are three questions that you should seek answers for while doing your research about a company about to go public. These questions are also based on the actual process of valuing the stock that’s about to be offered publicly.
Is there a high demand for the company’s products or services?
You have to know if there is indeed a realistic return on your investment when you put your money into the company. One of the signs that there is potentially good ROI in a company is when there is a solid demand for its product or services. When there is demand, there is profit, and there is profit-sharing among investors.
Does the company have a definite plan to address or foster growth in the future?
Your investment is for naught if the company has no definite plan to push forward and grow in the future. Without plans for growth or expansion, there will be no reason to expect that the company’s profit margins could improve and thus allow for the return of investments to the stock owner. Read the company’s financial statements, which you can download for free, and see what plans they have for growth and expansion.
Are there successful competitors in the company’s chosen industry?
This question can sound confusing and paradoxical, but it actually makes sense in the financial circles’ perspective. If other companies have succeeded in the same industry, there is reason to believe that the company has the potential to achieve the same thing. Thus, theoretically, investors will be as willing to fund this new company as they would its more established competitors.
The bottom line is – you will need to think like a detective when deciding to invest in a company’s IPO or not. You’ll have to be aggressive and diligent at reading relevant documents, like financial statements, press releases and news about the company that’s about to ask you to lend it some money for capital.
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